Young adults maintained strong credit health during the COVID-19 pandemic, despite the recession in 2020. However, new Urban Institute research suggests they began experiencing increased financial distress in 2023—especially those living in communities of color.

Young adults face employment instability and increased financial distress in the aftermath of recessions, which can undermine their long-term financial stability, ability to achieve life milestones, and ability to invest in wealth-building opportunities.

These effects are often more pronounced for young adults living in communities of color. Because these communities have faced decades of disinvestment rooted in structural racism that have limited opportunities and mobility, their residents are more vulnerable to economic shocks. This often results in increased delinquencies, debt burdens, foreclosures, and significant wealth losses. Communities of color may also recover from recessions more slowly, deepening these structural vulnerabilities.

Given these risks, it’s important to track how young adults living in communities of color fare during recession recoveries. By better understanding these trends, policymakers and other stakeholders can both ensure young adults remain on the path to long-term financial stability and address the disparate effects of recessions on communities of color.

Despite facing elevated financial distress and employment instability between 2020 and 2021, adults of all ages experienced improvements in credit health, likely because of expanded public supports and changes in consumption and spending behaviors. Over this period, credit scores improved steadily, while debt and delinquencies slowed. However, in 2022 and 2023, young adults’ debt and delinquencies started rising sharply, especially in communities of color.

Evidence from Urban research suggests one way to alleviate acute financial hardship is implementing consumer protection policies that ensure families can access essential services like housing and heat, even if they’re struggling to pay for them. However, broader policies are needed to address the root of financial pressures contributing to young adults’ current delinquencies, including those that incentivize building emergency savingslimit the repayment burdens of student loans and other loan products, and boost earnings—among others.

Read the full article about economic impact of COVID by Kassandra Martinchek at Urban Institute.